What are Lots?
The Forex market is the largest liquidity market around the world. With this data, it is not surprising that many day traders use Forex to speculate. But before picking a market in which to operate, one must understand the term Lots and its particularities.
There are many types of lots, as we will see, and it is essential to know and keep them in mind for our profits and losses. We are talking about the activities that we are going to execute in Forex through these lots. Yes, we exchange currency, but always within certain values, imposed by said lots.
What is a Lot?
The lot is the way to accomplish transactions in the Forex market. Every time we make a purchase or sale, we buy or sell certain units of that currency according to the value that it possesses at that moment in the market. The explanation is somewhat complex, but it is much more easily seen in the example below.
Having dollars, for instance, we want to buy Euros when the EUR/USD is at 1.4500 (the value is rounded to make the example easier). Hence, a certain amount of dollars will be needed to buy the Euros, right? If we use 10 Euros, we will acquire 14-15 dollars, and the change in the flows to obtain gains would be tiny. That’s why the lots were created, to get the market moving much faster in higher quantities.
Different Types of Lots
There are different types of lots, each with a specific value, from the standard lot, which is mostly the largest (100,000 units) to the variable lots, offered only by some brokers, which permit us to open operations for values that do not fit any of the other types of lots, though always with maximum and minimum restrictions.
Let’s have an overview of the different types of lots and their values.
- Standard Lot: As we have already noticed, the standard lot has a value of 100,000 units. This implies that every operation opened with this lot will be negotiating with 100,000 units, whether to buy or sell. The standard batch is the largest amount that is generally used when opening an operation.
- Micro Lot: Certainly forced by the arrival of new investors with much purchasing power, the Forex market (through the brokers) saw the need to develop another batch type, even smaller, worth 1,000 units of the base currency, i.e., 200 times less than the standard batch.
- Lot Mini: Instead of utilizing 100,000 as in the standard lot, the mini lot operates with 10,000 units of the base currency, a much lower amount, and much more accessible for new investors, who certainly do not want to risk in one go everything they have invested. They are generally utilized in risky investments, considering the loss would be less, though the gain would also be less important.’
Looking at all these alternatives, one can operate with the different types of lots. However, this in principle depends on the brokers, since we will be required to open a certain type of account associated with the type of lot with which we will operate. That is, with standard lots we will operate with a standard account, in a micro account, with micro lots. The possibilities are accustomed by the broker, in several situations based on the investment we want to make at the beginning.
We can request a standard from the beginning that is if we have the necessary investment and good leverage by the broker. However, this option is not encouraged for new investors, because operating with such huge amounts without possessing an in-depth knowledge of the market, is more likely to lose the investment quickly.